06 Sep Should I Start a Foundation?
As we get older, we are invited to charitable breakfasts, lunches, and dinner auctions. Before long, our calendars are filled with these events and we’re giving away money in a fun and social way. At some point, the realization sets in that while these are all great causes, they aren’t the causes that get you out of bed in the morning. The events stop being fun. At this point, it becomes increasingly important to develop a giving strategy and budget centered around your values. This not only makes it easy to say yes and no to giving opportunities, we think it makes for a joyful giver.
There are many ways to get organized and strategic with your giving. The most important is sitting down and writing out your values, establishing a giving budget, and searching out 501c3 organizations that align with those values. Soon, you’ll be the one doing the inviting. Utilizing a private foundation or a Donor Advised Fund (DAF) can, in most cases, significantly enhance your impact.
DAFs are very popular as they allow people to streamline their charitable giving for less cost and hassle than a private foundation. The new tax law should make DAFs even more attractive since most people won’t get a charitable deduction unless they lump their annual gifts into one big gift every few years. However, many are overlooking the benefits of having a private foundation or are mistakenly thinking they need many millions to open one.
Private foundations used to only make sense for the very wealthy. The tax and legal compliance costs alone made operating one so expensive we only recommended them for clients committing $5 million or more. However, you can now make one economically viable with as little as $500,000 provided you plan to grow it to $1 million or higher. I’ve even considered them for wealth creators with as little as $250,000 if their intention is to grow it fast. Before considering either a DAF or a foundation, it is essential to determine your gifting capacity.
Why Consider a Private Foundation?
I recently interviewed Sarah Hopper of Sound Philanthropy Advisors and asked her why a person would consider a private foundation over a DAF. Here is her response:
“A private foundation offers a level of ownership, autonomy and authenticity that a DAF does not. I have seen clients who are the sole Director of their private foundation blossom in the experience of doing something that is uniquely theirs, with their personal stamp on the approach, giving areas, brand and system.
Couples are sometimes like a ‘deer in the headlights’ at the idea of deciding on governance, operations and grantmaking systems for a foundation, but are full of pride when everything is in place and the end product is tailored to who they are.
Foundations that are in their third or fourth generation of leadership have a level of self-assurance and confidence in their approach to grantmaking, which comes from years of experience and refinement, and the wise understanding that foundations need to change with the needs of the times and the priorities of the family. I am not saying that these scenarios are not possible with DAFs, but because the structure is different and much of the administration is covered by the hosting organization of the DAF, from the start it is a different level of commitment to the planning and the process.
There is also more opportunity to be creative and innovative with your approach to philanthropy through a foundation. Investment opportunities that are aligned with mission, collaborative funding and various types of loans to nonprofits are all ways to leverage funding and are challenging to pull off with a DAF.
Engaging younger generations in an organized giving process is easier through a private foundation. The autonomy of a foundation offers a more independent platform to launch this kind of program, and that ability of the family to develop their own processes and policies makes the grantmaking easier.”
I couldn’t agree with Sarah more! The more involved you and your family want to be with philanthropy and your community, the more a private foundation could make sense. If you are on the fence about which you should choose, consider meeting with a philanthropy advisor like Sarah, or other people in your network that have run their own private foundation. This is one of those decisions that is best discussed rather than intellectualized.
How to Open a Private Foundation
Foundation Source is a firm that has made running a foundation easy and cost-effective with a turnkey solution. Another alternative would be working with your CPA and attorney to establish a foundation, but this will likely be much more expensive. Foundation Source charges $6,500 to set up, and the annual costs are $7,500 plus .30% of the assets. In addition, you’ll need to hire an investment manager or do the investments yourself so that can increase the overall cost.
Can’t Decide, Do Both!
We have many clients that have both. Often, as clients are building their wealth, they don’t have the time or energy to put effort into a foundation. Likewise, they typically don’t have enough gifting capacity to make a substantial enough gift to warrant a foundation. However, the two can work in tandem, especially when it comes to funding your philanthropic goals.
One of the benefits of a DAF is it’s a public 501c3 charity, meaning you can deduct gifts of up to 60% of AGI if giving cash, or 30% for appreciated long-term securities. Private foundations are limited to 30% of AGI for cash gifts and 20% for securities. In both cases, the charitable deduction can be carried forward five years. How these typically work together is clients will gift enough appreciated stock to the foundation up to the AGI limit of 20% and then gift 10% of AGI to the DAF, maxing out the 30% deduction for appreciated securities.
A Few Key Differences
DAFs have no requirements to make grants annually. You can literally make a gift, take the tax deduction, and take years before deciding how to distribute funds. With a private foundation, you are required to distribute 5% annually. Also, you can always close your foundation and transfer into a DAF if you find you don’t need the customization a foundation provides. However, you can’t contribute DAF funds to a foundation. So, before your DAF gets too large, it would be wise talk with your financial advisor about whether a private foundation is appropriate for your needs.
Foundation Source does an excellent job explaining the differences between DAFs and private foundations and I encourage you to download their detailed explanation here.
When considering the overall impact you want to make, don’t spend all your resources on philanthropy. Consider investing some of your dollars and time on systems change, which can include advocacy or getting involved in politics. This is considered 501c4 giving and is treated differently than 501c3 giving. Systems change can be the key to solving many issues that philanthropy only temporarily resolves.